Alibaba has leveraged its extensive cloud computing infrastructure to change into a number one investor in China's generative artificial intelligence startups, offering them loans to leverage the scarce network resources needed to coach models, relatively than traditional cash-for-equity financing.
The Chinese e-commerce giant is attempting to repeat the success of Microsoft's investment in US market leader OpenAI by investing in well-known startups Moonshot, Zhipu, MiniMax and 01.ai. They have all developed local versions of US applications comparable to OpenAI's ChatGPT and Character.ai's Avatar chatbot.
In one example, Alibaba led a $1 billion funding round in Moonshot AI, which valued the startup at $2.5 billion in February. According to 2 people conversant in the deal, $800 million flowed into the developer of the fast-growing AI chatbot Kimi, nearly half of that in the shape of cloud computing credits. Alibaba declined to comment.
Alibaba CEO Eddie Yongming Wu has personally overseen investments in the highest 4 AI startups over the past 12 months as the corporate seeks to reinvent itself as an AI innovator, in line with people conversant in the matter.
The investment push comes at an important time for Alibaba. The company is attempting to forge a brand new path because it grapples with increasing competition from ByteDance and PDD Holdings in its core e-commerce market, following the chaotic unwinding of its ambitious restructuring plan that included an initial public offering of its cloud business.
Alibaba canceled that plan in November, citing the impact of U.S. chip restrictions. Wu then took direct control of the cloud business, promising to take a position in AI and putting the business at the middle of his growth strategy.
The cloud sector has averaged single-digit quarterly growth since 2022 following Beijing's crackdown on major web firms. Its profitability lagged far behind that of U.S. competitors like AWS.
Charlie Dai, vice chairman and principal analyst at technology consulting firm Forrester, said Alibaba was “supporting the startups by offering a public cloud platform with wealthy features powered by its broad ecosystem for his or her open source models” and at the identical time Cloud business generated recent revenue for its firms by providing computing resources to coach their models.
The structure of Alibaba's investments in Moonshot is analogous to those of Microsoft and Amazon, which transfer money to AI startups with the agreement that they are going to use the cash to coach and run models on Azure and AWS servers, respectively.
However, the difference with the Alibaba investment, as one person noted, is that the cash is rarely transferred to the Chinese startups. Instead, they’re held in an escrow account that the corporate can record as income.
Computing-for-equity offers are more tempting in China, where cloud resources are scarce attributable to U.S. restrictions on exporting advanced chips. “Providing computing power is definitely more precious than money,” said a Chinese AI scientist. “Given the shortage of semiconductors, it is extremely difficult to get access to a ten,000 GPU (processing) cluster that Alibaba has.”
Social media group Xiaohongshu is taking a good more creative approach to investing, offering more traffic to startups' products through promotions on its popular Instagram-like platform in exchange for equity, two people conversant in the matter say. Xiaohongshu didn’t reply to a request for comment.
China's major web firms, including Alibaba, Meituan, Xiaohongshu and Tencent, are playing an outsized role in funding this wave of startups in comparison with previous AI startups dominated by watchdog groups SenseTime and Megvii.
During this phase of the investment wave, which peaked between 2017 and 2019, major technology investors comparable to Tiger Global and SoftBank, in addition to a big pool of domestic enterprise capital firms, competed with the web giants for deals.
But deteriorating relations between Beijing and Washington and a downturn in China's VC industry over the past two years have made today's AI startups more reliant on funding from domestic web firms, which in turn means They have less bargaining power in setting the value of cloud services, an individual with knowledge of the deals said.
Alibaba has change into a top investor precisely because it seeks to monetize its stockpile of AI chips. Alibaba Cloud bought high-end graphics processors from Nvidia, including large orders of the watered-down A800 and H800s series, before the U.S. restricted sales of advanced chips to Chinese firms. These are situated in data centers in China and Southeast Asia, in line with an individual conversant in the matter.
The cloud provider desires to capitalize on these chips before they lose their value when Nvidia releases its next generation of AI processors. Alibaba can be barred from purchasing the brand new chips due to Washington's tightened export controls, an individual near the corporate said.
Wu's concentrate on AI investments represents a brand new chapter for Alibaba after a regulatory crackdown on its alleged monopolistic behavior starting in 2021 led to the corporate having to divest shares in other web firms under pressure from regulators.
Alibaba has change into such a vital supporter of AI startups in China that industry insiders have began joking: “If you must put money into Chinese AI, just buy Alibaba shares.” It's a China AI ETF.” said an executive at an Alibaba-backed AI startup.
